Teachout: Why The DIA Should Be Saved

The Wall Street Journal‘s Terry Teachout says it’s not enough for supporters of the venerable Detroit Institute of Arts to fight calls to sell the publicly-owned museum’s treasures to pay the bankrupt city’s bills by saying, “How dare you!” Teachout says those who point out that Detroit has more important obligations — say, to its pensioners, or to its citizens living in fear of crime — than firewalling art must not be dismissed as barbarians:

Anybody who doesn’t want Detroit to sell its art must be prepared to go up against arguments like these. What’s more, the counterarguments will have to persuade locals who know how it feels to call the cops and get a busy signal. In my experience, art lovers aren’t accustomed to making that kind of argument, any more than they’re accustomed to living in a city without streetlights. Too many of them believe that the value of high art should be self-evident to all right-thinking people. It’s not an “argument” to suggest that anyone who advocates selling off the DIA’s masterpieces is an art-hating philistine. Even if they’re wrong, as I think they are, the sell-the-art crowd is making a morally serious case that can’t be countered by name-calling.

Teachout offers a couple of arguments that could work:

Contrary to popular belief, any money derived from the sale of the DIA’s art collection would not be used to turn on the streetlights of Detroit. It would go straight into the bottomless pockets of the city’s Wall Street bondholders. Why slaughter a world-famous museum for their sake?

If you truly believe that Detroit has a postcrisis future, then it’s your duty to preserve at least some of the things that help make the city worth living in—and visiting. Would you auction off the National Archives’ original copy of the Declaration of Independence to help pay down the national debt?

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23 Responses to Teachout: Why The DIA Should Be Saved

The big question–and given that there has not been a municipal bankruptcy of this size and scope (in a jurisdiction that has more serious problems that legacy debt):

What will the size of the respective haircuts of bondholders and pensioners be–with and without liquidating DIA?

Prior commenters have suggested a bait-and-switch is afoot; that arguments of “we need to sell the art, because of the poor retirees who otherwise will eat cat food”, but that the proceeds would predominantly go to bondholders (possibly because pensioners may be given higher priority).

Teachout mentions the pensioners, but doesn’t explain why they should have to pay to keep the art in Detroit.

If people want Detroit to keep the art, they should raise the money to buy the art and then return it to the city (or perhaps to a trust that would insulate the art from Detroit’s finances).

Anyone who wants pensioners, whose pensions average $19K a year, to contribute to save the art should pledge all of their income above an average Detroit pension (as reduced after bankruptcy) to save the art. If they think that’s an unfair sacrifice, they’d be right.

Teachout seems to recognize that this is a no-brainer issue. And the problem is that it’s a different no-brainer depending on our perspective (and my no-brainer perspective is clear from my earlier comment). My prediction is that the final answer will depend on which no-brainer perspective the bankruptcy judge has.

Would you auction off the National Archives’ original copy of the Declaration of Independence to help pay down the national debt?

I think many of the people who argue with a straight face that the Catholic Church should sell, e.g., the Sistine Chapel frescos (who exactly would buy them?) and “give the money to the poor” would do exactly that.

I see both sides of the argument, but have to admit that it burns my britches to see the people who profited from the government-funded crashed economy and profited from outsourcing every decent blue collar manufacturing job be able to buy up the public art at fire sale prices for their private collections *so they can repay themselves as bondholders*.

I find it interesting that no one mentions that defrauding a worker of his pay is, FWIW, classically listed as a sin crying out to heaven for justice. Public workers often have to take some combination of pay/job cuts during recessions, and promises with regard to pensions have typically been one of the ways that workers agree to those cuts.

Excellent points. Thanks for posting this. Its true, to prevail requires going up against the opposing argument, not merely dismissing it. Teachout offers a couple of very good ones. I think KateLE has pretty well demolished the “left-wing” argument for selling the art work.

Now, let me try again to put this in perspective. While $18 billion is a lot of money, and paying it off or reneging on it both require extraordinary measures, its not the “sky-is-falling” impossible scenario many make it out to be.

Detroit has a present population of 700,000. The debt is estimated at $18 billion. That is $25,714 per person. Stretched out over 25 years, it would be a little over $1000 per year per person. Painful, but not utterly impossible to contemplate.

What if $14 billion were rolled into long term bonds. That would be $20,000 per person. It takes a bankruptcy court to even do that, because it abrogates existing obligations to debt holders. To keep this simple I’m not figuring interest — and it might even be possible to say no interest jack, you’re lucky to not be getting a haircut.

Make the bonds 30 years. That would add $666 per year per person to the tax bill, average. Instead of those who happen to live in Detroit at this moment paying, the growing economy of a future recovering Detroit would help pay. If the population grows to 1,000,000 in fifteen years, that will reduce the overall burden.

This tax burden looming over property in Detroit will of course push the price down — buyers will want a discount for the increased tax liability. But that too spreads the burden around a bit. Debt holders would still have an asset on their books, if not as productive an asset as they hoped. No doubt the bonds will sell as a discount. But again, the pain will be spread around a bit. Some pension funds will buy the bonds at a discount and make a killing if they are paid off at face value.

I don’t think they’re going to do this. But the notion that we have have a fire sale because the ship is sinking is a bit overdone, mostly by people who want to … e.g. … sell off the art work.

If you were an institutional buyer of bonds, would you buy new bonds issued from a Detroit bankruptcy–and designed to pay off old creditors? What interest rate would you demand?

It’s very rare that anyone (or anything) in bankruptcy can restructure old debt with new debt–at least not without someone co-signing, or paying a ridiculous rate of interest. I believe the term for such debt is “junk bonds”. 🙂

If you are a teacher, public employee, entitled to a union pension member, own a mutual fund or own an IRA you’re probably one of those Wall Street bondholders.

This is true, but misleading. Dividing the loss between millions of bond holders instead of thousands of Detroit pensioners would be a lot less painful. It’s the difference between the blood loss from a finger prick for many and a gaping head wound for a few.

Also, I question how many of the bond holders really are pensioners or other lower/middle class people. If you’re going to make an argument like that, you need to show your math.

Public workers often have to take some combination of pay/job cuts during recessions, and promises with regard to pensions have typically been one of the ways that workers agree to those cuts.

These pension promises have also traditionally been one of the reasons why many talented people, who could have pursued higher-paying private-sector careers, chose instead to go into public service in the first place — e.g., teaching — rather than go straight into the private sector, where there might have been more short-term remuneration but shakier long-term prospects.

Evidently they gambled on the goodwill and trustworthiness of the public, and lost. Sucks to be them, I guess.

So I suppose now we run the risk that our public sector will be dominated by people who go into public service because they aren’t bright or capable enough to do anything else.

Another problem is how to deal with the long-term structural problems. If Detroit’s entire debt were cancelled, would it be able to bounce back, or are there long-term issues that prevent it from growing and that would make the need for a bailout perpetual?

“These pension promises have also traditionally been one of the reasons why many talented people, who could have pursued higher-paying private-sector careers, chose instead to go into public service in the first place…rather than go straight into the private sector…”

Most public sector employees above the worker bee level vastly over-estimate their value in the free market.

It is very simple. The city of Detroit has accrued debts because of the ongoing ineptitude of its “board of directors,” the city council and its “CEO,” the mayor over several decades and as such is subject to bankruptcy proceedings like any other corporation, and, that means that its assets are not subject to any special protections.

The statists are trying to prevent the bond investors from recouping any of their losses with such smoke mirror hogwash as the works of art belonging to the people.

Other assets subject to liquidation are the animals in the Detroit Zoo What about the animals? Who do they belong to, the people?

Sell it all including Belle Isle, liquidate the city’s holdings, and start all over by dividing it into five new corporations of equal value to prevent a disaster of these proportions from ever happening again.

If the current trend of Obamanizing the country at large continues, Detroit will be its introduction to its destruction.

Most public sector employees above the worker bee level vastly over-estimate their value in the free market.

Maybe so, but that’s completely beside my point. I’m not suggesting that all or even most public-sector employees have sacrificed lucrative careers they could have had in the private sector; but that unless the public sector offers sufficient incentives — which employees can trust won’t be yanked away from them years down the line — the public sector will never attract anyone except those who don’t have much “value” in the free market. Is that the kind of public sector you want? I certainly don’t.

Engineer Scotty, what I suggested has NOTHING to do with selling bonds on the open market. The idea would be to go to people who hold CURRENT debt and tell them, you are all about to take a HUGE haircut, but instead, the bankruptcy court has approved a decree in which your current debt-holdings are replaced with 25-year bonds at no interest, giving you full face value.

If they want their money right away, they will no doubt have to sell (on the open market) at a huge discount, to people who are willing to bet that the bonds will be paid back, and said speculators can double their money in the long run.

If they are patient, they will get their money back, although they will lose the opportunity to make a lot more money reinvesting it sooner or collecting interest. They will also avoid a huge immediate loss.

Its not likely to happen, it makes too much sense for a bankruptcy court to consider. But it would make the entire situation a lot less traumatic than it is probably going to be.

If you were an institutional buyer of bonds, would you buy new bonds issued from a Detroit bankruptcy–and designed to pay off old creditors? What interest rate would you demand?

Scotty, I said this once before, but it seems to have been lost in the bumpy transition of url’s at TAC. So here it is again:

You’ve missed the entire point. I’m not talking about selling new bonds on the open market. Bond-holders are facing a substantial haircut, no matter if the DIA collection is sold or not. So, the court might accept a proposal that the bondholders will be issued new bonds in place of their existing debt, payable over 25 years, at no interest. This will not be voluntary, it will be take it or leave it, or not even the option to leave it.

That is in itself a bit of a haircut, but a modest one. They still have full paper value for the principal, rather than having their principal cut in half. Over time, they might even get it all back. In the meantime, they have value on their books that wouldn’t be there otherwise.

Some will no doubt decide they want to get their money, cash in hand, now. They will have to sell at a discount, on the open market, to speculators who will take the risk that they might double their money if the bonds are in fact paid off.

Meantime, instead of putting the entire burden on the 700,000 people living in Detroit right now when its finances and prospects are at rock bottom, the debt will be shared with the million or so people who may live in a modestly revitalized Detroit, and with greater incomes and property values, over the next 25 years. Among other things, those who will continue to enjoy the paintings at the DIA over the next 25 years will in fact contribute to paying off the debt.

The looming tax burden will no doubt lower the value of real estate, because buyers will want a discount to compensate for the taxes they will be paying. That’s one of the ways the pain will be distributed widely.

We don’t like our creditors, so we don’t have to pay our debts to them. This seems like a prudent foundation on which to build a society that works.

Well, bankruptcy is about providing an orderly proceeding for discharging debt when the prudent foundation falls out from under a transaction or an enterprise. Either there is a way to make sure everyone does get paid in the end (akin to an individual in Chapter 13) or some of the debts are wiped out (Chapter 7).

IF someone is going to take a loss, workers owed wages and benefits and pensions come first, holders of investment debt second. This goes back to the days when the common law allowed a sharecropper to be left with nothing at the end of the season because the crop in the fields was seized to make good the landowner’s debts, or, the employer’s bankruptcy meant the bank took all the money and assets, and if someone was due for a bi-weekly paycheck, too bad, the money wasn’t there. There is something about that, that inherently shocks the conscience, and the law was adjusted to give wages and share to the cropper first, other claims second.